The North Las Vegas, Nev., City Council has rejected a proposal to use eminent domain as a tool to help homeowners get out from underwater on their mortgages.
North Las Vegas is one of numerous municipalities that have been considering using eminent domain as means to get out of a deep housing crisis – each has thousands of underwater properties with many wavering on foreclosure within its town boundaries. The controversial idea, which is strongly opposed by investors, has been considered by a number of communities over the past year including Chicago; Stockton, Calif.; San Bernardino, Calif.; Richmond, Calif.; and Brockton, Mass. Some, including Richmond, are still considering such proposals, despite the threat of lawsuits.
The concept involves a local government purchasing underwater mortgages secured by properties within its borders, restructuring them to reflect actual property values, and then reselling them on the secondary market. In the event servicers and investors are unwilling to participate, then the municipality would seize the loans (with compensation to the owners) using eminent domain.
The North Las Vegas City Council last week rejected the proposal, which was brought by Mortgage Resolution Partners (MRP), by a 5-0 vote. MRP had proposed helping the city to acquire and refinance loans from a group of more than 3,900 mortgages, according to a Reuters report. MRP had said the city risked as many as 2,500 foreclosures from underwater mortgages held in private label mortgage securities.
Some local officials were skeptical of the plan right from the start, according to an article in the Las Vegas Review-Journal. MRP stood to collect a $4,500 per-transaction fee, according to the report.
The North Las Vegas plan would have applied only to private-label securities and not loans backed by government-sponsored enterprises Fannie Mae and Freddie Mac.
In August, the Federal Housing Finance Agency (FHFA) issued a statement vowing to fight local, county and state eminent domain proceedings in court and threatening to cut off involved municipalities from access to Fannie and Freddie loans should they choose to pursue the eminent domain option.
As the conservator of Freddie Mac and Fannie Mae, as well as the Federal Home Loan Banks, the FHFA is concerned that widespread seizures of the loans and their subsequent refinancing would diminish asset values.
In a recent memorandum, the FHFA explains that it ‘continues to have serious concerns on the use of eminent domain to restructure existing financial contracts and has determined such use presents a clear threat to the safe-and-sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.’
‘This use of eminent domain also runs contrary to the goals set forth by Congress for the operation of the conservatorships by FHFA,’ the agency wrote in its statement.Â ‘Therefore, FHFA considers the use of eminent domain in a fashion that restructures loans held by or supporting pools guaranteed or purchased by FHFA-regulated entities a matter that may require use of its statutory authorities.’
In response to the actions on the part of the aforementioned municipalities, the FHFA states that it may consider initiating legal action against any municipality, county or state which ‘sanctions the use of eminent domain to restructure mortgage loan contracts that affect FHFA's regulated entities.’ What's more, the agency says it will ‘limit, restrict or cease (the government-sponsored enterprises and Federal Home Loan Banks') business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts.’